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Facebook Is Bruised but Far From Broken After Congressional Scolding

At one point during last week’s five-hour Senate hearing on Facebook privacy practices, Sen. Dick Durbin (D-Ill.) tried to score points off the lone witness with a few barbed queries.

Would he, Mark Zuckerberg, be comfortable sharing with the world the name of the hotel where he stayed last night? “Umm,” the Facebook CEO responded with a nervous chuckle before pausing for five seconds. “Umm … no.” How about the names of people he’s messaged in the past week? “Senator, no, I probably would not choose to do that publicly here,” Zuckerberg replied.

That awkward exchange characterized the theatrical reprimands from U.S. lawmakers, who hauled Zuckerberg in to express anger and impatience with Facebook’s mishandling of user data. As expected, many politicos also raised the prospect of new laws to keep the company in line. Facebook’s public spanking was sparked by revelations about Cambridge Analytica, the consulting firm that — and this was the red flag that made it a federal case — worked with Donald Trump’s 2016 campaign. The British firm improperly paid a third-party researcher for data on upwards of 87 million Facebook users without their knowing it, and Facebook didn’t disclose the breach on learning about it three years ago.

Apologies were expected. Zuckerberg delivered those, maintaining his poise, vowing Facebook would do better, promising to follow up on specific points — and saying he was open to the “right” kind of regulations. He checked off all the boxes required for an obligatory trip to the congressional woodshed.

“It was my mistake, and I’m sorry,” Zuckerberg told the House Energy and Commerce Committee on April 11, after professing the same mea culpas to the Senate Judiciary and Senate Commerce Committees a day earlier. “I started Facebook, I run it and I’m responsible for what happens here.” In the end, though, Zuckerberg didn’t commit to any real changes apart from what Facebook has already said it’s going to do. After 10 hours of talk, nothing new emerged except for a few tidbits like Zuckerberg admitting that information on himself was among the massive batch of files Cambridge Analytica had harvested. He also remarked that “there will always be a version of Facebook that is free.” That prompted speculation that the company may launch a subscription version someday, but analysts see that as unlikely.

So after all the posturing, what’s the upshot for Facebook?

The tea leaves right now indicate nothing in the offing that will derail its enormous momentum. In terms of regulations, the service, which has 2.1 billion users (and growing), is looking at a modest wrist slap, although in the short term, potential FTC fines could be painful.

What was different about the Zuckerberg hearings is that lawmakers, even those who historically have opposed internet regulations, were voicing the need for new rules. The “Trust us” argument wasn’t flying: “They’ve had 14 years of self-regulation and still haven’t managed to do it right,” says Allie Bohm, policy counsel at consumer-advocacy group Public Knowledge.

Overall, though, Facebook is expected to remain hugely profitable. Factoring in expected fallout from the Cambridge Analytica scandal, Cowen & Co. analyst John Blackledge last week trimmed estimates for Facebook to 17.3% annual growth in net profit from 2018-23 (down from 17.9% previously). That’s not really much of a monkey wrench in the cash machine. For Facebook, it’s been business as usual since the Cambridge Analytica scandal broke, according to the company’s VP of global marketing solutions, Carolyn Everson. There haven’t been any “wild changes” in users restricting the data they share, she said at a Wall Street Journal event April 12 in London. “We are not anticipating major changes to our overall revenue and business model” as a result of stricter regulations, she added.

After the initial Facebook/Cambridge Analytica reports in mid-March, ad spending on the platform increased 7% for the week of March 17 (versus the year prior) and rose 15% the week of March 24, as measured by ad-tech firm 4C Insights. “Advertisers have pretty much stayed course with their Facebook plans to this point,” says an exec with a major ad agency. In surveys, many Facebook users have shown wariness or deep mistrust of the social goliath — 9% of Americans surveyed by market research firm Creative Strategies earlier this month said they have deleted their accounts entirely. Investors are waiting for Facebook’s first-quarter 2018 earnings on April 25 to assess the immediate damage the scandal may have exacted.

Meanwhile, implications seem minimal for the thousands of other companies that rely on analyzing consumer behavior using vast amounts of data, according to SunTrust analyst Youssef Squali. For the internet media sector broadly, the probable adoption of new U.S. privacy laws as a result of the Cambridge Analytica uproar isn’t likely to change their long-term business outlook, Squali says.

Ultimately, the U.S. will likely follow the lead of Europe’s General Data Protection Regulation, which takes effect in late May and is designed to give consumers full control over what information data companies can and can’t store on them. In Squali’s analysis, because Facebook, Google and others are already gearing up to comply with GDPR, the costs to deploy similar controls worldwide should be manageable. Notes Bohm: “GDPR takes the objection that ‘This is not affordable’ off the table. These companies aren’t pulling up stakes in Europe.” Zuckerberg reiterated in his statements last week that Facebook would make GDPR-based features available to U.S. consumers as well.

The real losers in the Cambridge Analytica imbroglio probably won’t be Facebook but the companies that have relied on its relatively liberal flow of data. Ahead of any new regulations, Facebook has instituted stricter vetting processes for app developers. It’s also winding down a program that let advertisers target users by correlating their info with third-party demographic databases from brokers like Experian and Acxiom — a standard industry practice but one Facebook is ceasing as a show of good faith. In a blog post, Acxiom CEO Scott Howe urged clients to “vote with your marketing budgets” to protest the move and said he was hopeful the company would reconsider.

Of course, the hammer could still drop on Facebook. If it reveals that another massive trove of user data was misappropriated, it could pour gasoline on the nascent #deletefacebook movement and kick government agencies into overdrive.

The dust will settle once politicians extract their pound of flesh from the company, predicts Murray Gunn, head of global research at financial markets research firm Elliott Wave Intl. He compared the current scrutiny of Facebook to the U.S.’ antitrust lawsuit against Microsoft in the late 1990s.

“What happens is the government takes aim at a successful company and eventually a settlement is reached,” he says. “The U.S. government has a long history of attacking successful corporations at their market tops.”

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